PARTNERSHIP FORMATION
INTRODUCTION TO PARTNERSHIP
ACCOUNTING FOR PARTNERSHIP FORMATION
EMPV
PARTNERSHIP
• Is a contract between two or more persons who bind themselves to contribute money, property or industry to a common
fund with the intention of dividing the profits among themselves.
CHARACTERISTICS:
a.) Voluntary agreement
b.) Mutual contribution of money, property or industry to a common fund.
c.) Co-ownership of property
d.) Mutual Agency
e.) Unlimited Liability
f.) Limited life
g.) Division of profits among partners
• A partnership may be perfected in any form, however it is always preferable to have the contract in writing.
• Under the New Civil Code, the partnership contract is required to be in writing when:
a.) immovable property or a real rights are contributed or
b.) partnership capital is at least P 3,000.
ARTICLES OF CO- PARTNERSHIP
The articles of co-partnership is the written contract of a partnership. It contains:
• Name of the partnership
• Names and addresses of the partners
• Effective date of the contract
• Nature of business, purpose and principal office of business.
• Capital of the partnership, stating the contributions of the partners, description and agreed values
• Rights and duties of each partners
• Provisions for additional investments and withdrawals
• The manner in which profits or losses are to be shared
• The manner of keeping the partnership book of accounts
• The procedures for dissolving the partnership
• The provision for arbitration in settling disputes
KINDS OF PARTNERS
• As to nature of contributions:
a.) CAPITALIST PARTNER – a partner who contributes money or property into the partnership.
b.) INDUSTRIAL PARTNER – a partner who contributes only his industry or services to the partnership.
c.) CAPITALIST – INDUSTRIAL PARTNER – a partner who contributes money or property as well as
his industry or service to the partnership.
• As to liabilities to third persons:
a.) GENERAL PARTNER – a partner whose liability to partnership creditors extends to his personal assets.
b.) LIMITED PARTNER – a partner who liability to partnership creditors is limited only to his capital
contributions.
KINDS OF PARTNERS
• As to their obligations to the business:
a.) MANAGING PARTNER – a partner who manages the affairs of the business.
b.) SECRET PARTNER – a partner who is not known by third parties to be a partner but takes active part
in the business.
c.) SILENT PARTNER – a partner who is known by third parties to be a partner but does not take active
part in the business.
c.) DORMANT PARTNER – a partner who is not known by third parties to be a partner and does not take
active part in the business.
.) OSTENSIBLE PARTNER – a partner who is known to the public as a partner and takes active part in the
management of the business, whether or not he has an actual interest in the firm.
CLASSIFICATIONS OF PARTNERSHIP
• As to liability of partners:
a.) GENERAL PARTNERSHIP – a partnership wherein all partners are general partners
b.) LIMITED PARTNERSHIP – a partnership wherein it is composed of one or more general partners and one or
more limited partners. This type of partnership bears the word “Limited” (Ltd.) in its partnership name.
• As to object:
a.) UNIVERSAL PARTNERSHIP OF ALL PRESENT PROPERTY – a partnership wherein all partners
contribute all the property which actually belongs to them to a common fund with the intention of dividing the same
among themselves as well as the profits which they may acquire therewith.
b.) UNIVERSAL PARTNERSHIP OF PROFITS – a partnership wherein all that partners may acquire by their
industry or work during the existence of the partnership will be divided among themselves.
c.) PARTICULAR PARTNERSHIP– a partnership wherein it has for its object determinate things, their use or
fruits or a specific undertaking, or the exercise of a profession of vocation.
CLASSIFICATIONS OF PARTNERSHIP
• As to duration:
a.) PARTNERSHIP AT WILL – a partnership wherein no time or period is specified for its existence and is
not formed for a particular undertaking or venture.
b.) PARTNERSHIP WITH A FIXED TERM– a partnership wherein its existence is fixed and agreed upon.
• As to purpose:
a.) COMMERCIAL PARTNERSHIP– a partnership that is organized for the purpose of delivery of goods.
Ex. Merchandising and Manufacturing Businesses
b.) PROFESSIONAL PARTNERSHIP– a partnership that is organized for the practice of profession or
provision of services.
Ex. Professional firms (Audit firms, law firms and etc.)
ADVANTAGES & DISADVANTAGES OF A
PARTNERSHIP
ACCOUNTING FOR PARTNERSHIP
FORMATION
• A partnership is formed either of the following:
a.) 2 or more INDIVIDUALS form a partnership for the first time
b.) 2 or more SOLE PROPRIETORS form a partnership
c.) An INDIVIDUAL and a SOLE PROPRIETOR form a partnership
• When a partnership is formed, separate accounts ( DRAWING and CAPITAL ) are established for each partner.
• Assets invested by the partners to the partnership are recorded by crediting the capital account of the contributing
partner:
Asset xx
Partner, Capital xx
• Non-cash assets contributed are recorded at AGREED VALUES by the partners, which generally base on the asset’s
FAIR MARKET VALUE at the TIME OF CONTRIBUTION.
• Any obligation assumed by the partnership is credited to a liability account.
• Admission of an industrial partner is recorded through a memorandum entry only.
MEMO : Partner A is admitted as an industrial partner, with 15% share in profits.
,
ACCOUNTING FOR PARTNERSHIP
FORMATION
• IF TWO OR MORE SOLE PROPRIETORS FORM A PARTNERSHIP :
a.) NEW SET OF BOOKS
ü Both the individual books of the sole proprietors are adjusted based on its agreed value DIRECTLY TO THE CAPITAL
ACCOUNT.
ü Close all the accounts at their adjusted balances.
ü Transfer the assets and liabilities assumed to the new partnership books.
b.) RETAIN ONE OF THE BOOKS OF THE SOLE PROPRIETOR
ü Both the individual books of the sole proprietors are adjusted based on its agreed value DIRECTLY TO THE CAPITAL
ACCOUNT.
ü Close all the accounts of the sole proprietor who will not retain his book.
ü Transfer the assets and liabilities of the sole proprietor whose book was not retained to the retained book.
* If an individual and a sole proprietor form a partnership, a new partnership book or they may also retain the book of the sole
proprietor to be use as the partnership book. Procedures are also the same as discussed above.